Cryptocurrency: The emerging landscape for Indian economy

When our Hon’ble Finance Minister said “RBI had registered its concern over the adverse effect of cryptocurrencies on the Indian economy” on 18th July 2022.

In this statement, Hon’ble Finance Minister shared his concern about cryptocurrencies. RBI mentioned that cryptocurrencies are not a currency because every modern currency needs to be issued by the central bank or the government. Further, she said, the value of fiat currencies is anchored by monetary policy and their status as legal tender. However, the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored, so it will have a destabilising effect on the monetary and fiscal stability of a country.

Earlier in 2018 also, RBI prohibited its regulated entities to deal in virtual currencies (VCs) or provide services for facilitating any person or entity in dealing with or settling VCs. The circular was set aside by the Supreme Court on March 4, 2020.[2]

These kinds of announcement might scare anyone who wants to or has invested in cryptocurrency but there are many people who never understood how it works? And what is its future?

Let’s understand with an example. Ram and Shyam are two friends. Shyam did some work for Ram. In turn, Ram rewarded Shyam by giving him some ‘digital’ coins. In this way, they maintained a ledger for this transaction. If this ledger is maintained in centralized manner then it may be hacked or manipulated. Now, here comes the revolutionary technology. What if, this ledger would be stored on each computer connected in peer to peer fashion? Each computer will maintain the total number of digital coins in the network. If a person wants to manipulate this computations of digital coin, then his claim will be ‘mismatched’ by rest of the computers and eventually he will be caught.

Now transform this example to clear the concept of ‘Cryptocurrency’.

The digital coins exchanges among the players for some ‘work’. This kind of currency is called cryptocurrency. ‘Crypto’ means secret and ‘currency’ means medium of purchase of goods and services. That means Cryptocurrency is a secret or private currency. Most popular cryptocurrencies are Bitcoin, etherium, dogecoin etc.

The public ledger which is maintained by millions of people on the peer to peer network. This revolutionary technology is called Blockchain Technology. For example, a train has many coaches. In the same way, in the blockchain if one coach is filled with a transaction, the next coach will be attached and so on. For adding a new block, it is necessary to solve complex mathematical puzzle based on AI/ML. High performance machine that has more computation power will be able to add new block to the previous block. The system rewards you with some bitcoins (freshly minted bitcoins)! Hence, all the transactions are connected to each other in the form of blockchain with complete transparency!

In such scenario, if someone wants to cheat or fraud then that person can be tracked easily. The system will first check the number of digital coins Ram had and the complete history of transactions of digital coin in his account. Subsequently, it will transfer the required one digital coin from Ram’s account to

Shyam’s account with complete accuracy and transparency within few seconds. This transaction is complete on the technology/platform called Blockchain.

The people who are maintaining the public ledger or updating it regularly are known as miners. This process of automated validation of transactions is called mining. However, this technology needs special high performance computers to maintain such hardware and software.

Now the question arises, as the system has all the information maintained in all systems. So, there is no Data privacy in Blockchain Technology. There is one more important principle called Cryptography i.e. the people are recognized by codes not by their names. This is one of the most important reasons of exponential rise in popularity of cryptocurrency. As most people have the objection when the money belongs to us then why the banks, authorities and agencies are custodian of our data.

Earlier, whatever fiat currencies we had were backed by gold until 1971. After that, whatever money comes into the system is not pegged to gold. Governments can print as much money as required. [4] Now, US is printing trillions of dollars everyday equivalent to India’s GDP. Therefore, value of our fiat currencies is diminishing. With rise in inflation, Government has the power to print more Indian currency. Plus, valuation of Rupee versus Dollar is fluctuating. Earlier people used to invest in gold, equity, real estate etc. Now equity market and gold is already at its peak, real estate is not giving that much returns. Consequently, there was increase demand to have a currency which is decentralized. That is why people have started investing more money into Bitcoin because they see it as a good store of value i.e. an asset. It is very good portfolio diversification by putting as low as 10% of your cash reserves in it. This provides very good hedging against inflation.

Moreover, if you look at 2008 financial crisis, it was a mistake by some of the banks giving bad loans and the whole world got into recession. This leads to the genesis of Bitcoin. Pseudonymous name called Satoshi Nakamoto described how you can build monetary system without the need to trust banks. [5] If you own some Bitcoins then it totally belongs to you.

Today, if I want to transfer money from India to person in US then there are many layers/payment gateways through which it goes, authenticates and finally it lands up to the said person in US. But if Blockchain is implemented, then I will be directly transferring money from India to the person in US (with proper id). That means they are skipping all the layers of bureaucracy. This is indeed the reason why Government is little afraid of this technology.

If we are able to transfer money directly through crypto, people think it may fuel terrorism and crime may increase. In fiat currencies, all these negative activities still happen but crypto will make it more transparent as we will now be able to trace and track the transactions. In this way, the regulations of the country would be able to help keep the bad actors out of the financial system.

It should be thought carefully why my financial assets in banks, stocks etc. should be known to Government. Moreover, how to decide the price of such a currency? How bitcoin rate is increasing or decreasing?

It should be noted here that it is already defined that the total number of digital currency (say Bitcoin) is fixed at 21 million. Further, their rate is defined by their demand. In addition to this, any number of paper notes can be printed but Bitcoin is limited only to 21 Million coins. For example, the value of bitcoin in Aug 2010 was Rs. 2.85/- but in Aug 2022 the value of bitcoin is around Rs. 18.18 Lakhs. That means if you had invested Rs. 100/- on bitcoin in Aug 2010 but its value in Aug 2022 is around Rs. 6.6303 crores!

Hence, advantages of using cryptocurrency are: first, Decentralization: There is no one country or one power that is controlling it. Individual’s demand is actually controlling it. Secondly, there is no Government control. Thirdly, it ensures complete Safety.

Blockchain Technology will be used not only in digital currency but also in education, healthcare, data management, and many other areas. But there are some disadvantages of cryptocurrency. First, as no Government or Authority is governing it, if you have some complain then where would you go. Second, as this is a secret currency, this might be

used in unethical ways. Third, Mining process in Blockchain is not eco-friendly. As lot of power is used 24×7 in this technology.

Now the question arises, whether Crytpocurrency is legal in India? The answer is yes! Investing, holding and trading in Cryptocurrency is legal in India but it is still not the ‘legal tender’ of money. That means you cannot use it instead of normal currency in India.

Even as the RBI and the Government have not formed an opinion on the cryptocurrencies, there are many Indians who have taken exposure in crypto market. According to data from crypto exchanges, there are approximately 1.5 crore Indians who have invested in cryptocurrencies holding Rs 15,000 crores.

There are more than 350 startups operating in blockchain and crypto. Crypto exchanges, CoinSwitch Kuber and other exchanges, have seen a big rush in demand from users and crypto exchanges are advertising heavily on investments. On March 25 2020, RBI Governor had said the central bank has flagged some major concerns to the Government about crypto currencies. Both RBI and the Government are committed to financial stability.

While the RBI is clearly not comfortable with the idea of cryptocurrency as a medium of exchange, the government’s stance on this issue is not clear. The government has proposed to present a Bill to regulate cryptocurrencies called The Cryptocurrency and Regulation of Official digital currency Bill, 2021. The Bill has provisions to make any dealings in cryptocurrency illegal. But there is no clarity yet on when this Bill will be introduced in Parliament.

Bitcoin is wonderful for people who buy it, sell it and trade it. Moreover, crytpocurrency platforms allow you to store Bitcoin safely. It is advisable to always invest based on your risk taking potential. Try to understand the background of each coin you want to invest in and gradually experience and invest accordingly. For us, it should be a great learning and digital diversification of the currency. The main idea behind cryptocurrency is – If the currency belongs to all, then the control should also belong to all!

If government think of banning Bitcoin, what would happen to people who have already invested in Bitcoin?

There is a clear paradigm shift towards investment into Bitcoin. Most of the government has realized that it is an asset class. If big companies like Tesla can invest heavily in Bitcoin instead of cash reserves then why should we stop Indian companies to invest in it as it is the future of money! They might become the Amazon’s of the blockchain world. Our Government should understand and regulate it so that more start- ups can come up from blockchain technology. We may also use blockchain technology to prevent piracy of movies by breaking the complete movie into millions of parts in computer then hacker would not be able steal those millions of parts as each one is stored in millions of computers with password for each computer! So this technology is amazing with respect to data privacy as well as increase in data security and speed of availability. However, this technology needs lot of electricity 24×7. To solve this problem, the coins may be harnessed by Bitcoin miners in countries lying in colder regions where solar energy may be used to maintain this ledger and in return, miners will get rewarded by bitcoins!

Cryptocurency in India is still under niche stage. Government of India has started STPI FinBlue which is an integrated program for fintech Start-ups to scale through its incubation facility by providing access to SandBox environment consist of APIs of different participating banks, NPCI products Core Banking Software and other enabling services through various stakeholders. Currently, more than 41 fintech start- ups are onboard by STPI Chennai since its inception on July 2019. These start-ups are working in various fintech domains viz. wealth management, banking, stock market, lending, credit, cross border payments, insurance etc.

First, these start-ups are building a blockchain platform for replicating the complete equity market. The startups who want to build any kind of such solutions will become part of this ecosystem. More people will invest in equity on these platforms. Second, start-ups builds product and services which Indians can use to do better investment or wealth management. So, anything that happens in the current financial systems can use blockchain and build a decentralized financial system – “DeFi”. As presently, banks are

using the old technology. People in villages do not have access to credit. They have to rely on middlemen for loans at exorbitant interests. But, with blockchain the whole world will get connected, it will be very easy to get loans irrespective of whether you are rich or poor. Lending industry will get evolved as it is totally based on algorithms.

Let’s suppose India was given the opportunity to hold gold as much as possible, then everyone would want to accumulate it as much as possible. Right now, it is an opportunity of ‘digital gold’ in front of us that we Indians can buy bitcoins or build products so that if value of bitcoin increases, there would be an asset appreciation which would lead to increase in our GDP. Optimum approach would be to understand and regulate it. By harnessing this technology, India will become five trillion dollar digital economy soon.

The article has been written by Dr. A.K. Garg, Scientist ‘F’, MeitY and Sangeeta Hemrajani, Scientist ‘D’, STPI Noida,

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